Sell to open 1 July 50 call.
Buy to open 1 August 50 call.
Notice that both strikes are the same and the two options share a common strike. The general idea behind the strategy is that the July option is expected to lose time value faster than the August option. Thus it should profit from the relative difference in time erosion between the two options.
However one is cautioned to check that the time erosion on the nearby option will actually lose time value faster than the farther out option. To check this, always use an options calculator such as the one at the CBOE website. I think of the farther out option as a protective option which controls your risk. As a result of this hedge the risk is strictly limited to the small debit amount that you paid to enter this position.
The peak profit will be achieved when the stock is trading at the common strike price. That is the time to exit because you will be giving money back if the stock moves up or down from that point forward.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV